Exclusive: Senate asked to probe FBI case

WASHINGTON, April 25 (UPI) -- Sens. Charles E. Grassley, R-Iowa, and Patrick Leahy, D-Vt., called Friday for a Senate inquiry into the latest FBI espionage scandal as the implications of the penetration of the bureau by an alleged Chinese spy spread to the 1996 presidential election campaign finance investigation, United Press International has learned.

According to congressional sources, the two prominent senators have written to Sen. Orrin Hatch, R-Utah, chairman of the Judiciary Committee, asking for hearings on the growing crisis of espionage failures at the FBI.

The latest scandal involves a wealthy, 49-year-old California woman and major Republican Party contributor who the FBI said in a court affidavit was a "double agent," working for two decades for the FBI while secretly reporting to Beijing.

Katrina Leung was held without bail last week on charges of spying for Beijing while posing as an FBI informant for a super-secret FBI counter-intelligence team in California.

According to an FBI affidavit filed in support of an arrest warrant for Leung, she had sexual relations over decades with two senior FBI counter-intelligence agents and was able to obtain top-secret information and documents from them that she provided to the Ministry of State Security, the Chinese intelligence agency.

One of the agents, James J. Smith, a former supervisor in the Los Angeles office and her key FBI "handler" for two decades, was charged with gross negligence with national security documents. The other, William Cleveland, who is also retired, was a supervising agent and expert on Chinese intelligence in the San Francisco office. He is reportedly cooperating with investigators.

Neither could be reached for comment, but a lawyer for Leung has said she is innocent.

During the course of its investigations, UPI has been told:

-- Senate investigators in 1996 suspected Leung as being a conduit for secret Chinese government payments to the Republicans, but the committee, headed by former Tennessee Republican Sen. Fred Thompson, dropped the inquiry before a report could be written. "The money came out of Macao," said one former congressional investigator, and "was funneled through Taiwan."

-- At that time, Leung was a key FBI asset under the direction of Smith. UPI's source said that investigators for the Thompson committee "guessed" she was an FBI asset, because the bureau resisted letting her be interviewed.

-- At the same time Smith was supervising Leung, he was also the agent the FBI assigned to one of the key prosecutions of another aspect of the 1996 probe, the secret Chinese payments to the President Bill Clinton/Vice President Al Gore campaign. Smith was assigned to debrief Johnny Chung, who was secretly cooperating with the FBI and admitted feeding $400,000 to the Democratic campaigns. Chung had to be put under protective custody after word of his cooperation leaked to China. He was convicted of bank fraud, tax evasion and conspiracy involving campaign donations. Investigators want to know if Smith let Leung know about Chung's cooperation and she fed it to Beijing.

-- Some Senate investigators suspect that Leung was the Republican opposite number to Chung. She is a major contributor to GOP candidates, including, indirectly through political action groups, the 2000 campaign of President George W. Bush.

-- The disclosure that Leung might have been a double agent is "devastating" to the investigation of secret Chinese campaign contributions to Clinton/Gore, according to a former senior congressional investigator. He said congressional investigators relied on the guidance of FBI agents and "were confident in what we were told by the FBI Director Louis Freeh." Some 150 suspects in the case either fled or avoided prosecution, he said.

-- Senior FBI officials had known as early as 1991 that Leung was a double agent, according to an interview with former FBI agent I.C. Smith, who related how a crucial counter-intelligence mission to China in 1990 might have been compromised by Leung's deception. Smith said he made the trip with Cleveland, one of the two agents accused of having an affair with Leung.

-- Cleveland, the San Francisco senior FBI agent accused of a sexual relationship with Leung, became the security officer for the Lawrence Livermore National Laboratory nuclear weapons program after his retirement from the bureau in the 1993. Former agents said security at the laboratories might have been compromised.

-- Brian Sun, a prominent defense attorney of Asian descent, is representing Smith in this matter. He defended Johnny Chung in the Clinton case and several other suspects in the campaign financing scandal. His firm -- O'Neill, Lysaght & Sun -- also won freedom for Wen Ho Lee, a former Los Alamos nuclear scientist who was accused of espionage by the FBI. Espionage charges against Lee were dropped and he pleaded guilty to a much less serious offense -- using an unsecured computer to download national defense information -- and was sentenced to 278 days, the time that he had already served.

Last week, the Department of Justice told Congress that Leung might have compromised virtually every Chinese espionage case over two decades.

I.C. Smith, who is no relation to the Smith in the Leung case, said in 1990 that he had been detailed by the FBI to head a counter-intelligence team at the Department of State to assist the department in tightening up security against espionage in U.S. embassies in communist countries. This was after American Marines guarding the U.S. Embassy in Moscow had been "compromised" by female agents operating for the Soviet KGB.

Smith said Cleveland -- at that time a well-regarded FBI expert on counter-intelligence against the Chinese security services -- was assigned to accompany him to China. They visited the U.S. Embassy in Beijing and then flew to inspect security at a U.S. consulate in northeastern China near North Korea. While there, he and Cleveland encountered a Chinese man who had been a suspect in a major U.S. counter-intelligence investigation. The two American security officers thought it was a coincidence.

But in 1991, Cleveland called him and told him the chance meeting was no coincidence. "He said they knew we were coming and everything we were going to do," Smith recalled.

He said he now believes that the call from Cleveland followed an incident related in the FBI affidavit filed in court in Los Angeles. In the affidavit, the FBI said that in 1991, Cleveland discovered Leung was possibly a double agent when he listened to a tape of a wiretap where she was talking to her supervisor in the Chinese intelligence service. She is code-named "Luo" and her Chinese handler was "Mao."

Cleveland, the report said, called Smith in a panic, but Smith reassured him that he would take care of it. Several unidentified sources quoted by different media outlets reported that there was a meeting on the issue in May 1991 at FBI headquarters in Washington, but there are few details known. Nevertheless, Smith, who had a sexual relationship with the woman from the early 1980s to November, 2000, continued to supervise Leung until his retirement, the FBI affidavit said, and even provided her classified information after he left the bureau.

I.C. Smith told UPI that it would be extraordinary for the bureau not to take this into account and the senior officials who were at the meeting should be sought out and interviewed by federal investigators.

Leung's wealth and prominence were well-known in Los Angeles. She had received $1.7 million from the FBI. In 1995 and 1996, when she was making numerous political contributions, she was paid $1.2 million negotiating a deal that allowed Nortel Communications to do business in China. Using the name "Merry Glory" for the deal, prosecutors said, she received 3 percent of any contract she obtained.

Prosecutors opposed bail for Leung, noting that she had $872,000 in cash in the bank that could be used to flee with. She is also accused of falsifying a mortgage arrangement on her $1.4 million San Marino, Calif., home that made it appear she was paying a mortgage. But the payments, the government said, were to an entity that she and her husband controlled.

But it was the political contributions she made that attracted Senate investigators, UPI was told.

Though her 1995 and 1996 contributions have not been detailed, the American Reporter reviewed campaign records that showed she has given thousands of dollars to Republican candidates including, indirectly through political action groups, to President George W. Bush's 2000 campaign.

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